“Paws” – and Consider a Professional Corporation. A Primer for Veterinarians

July 1, 2012 | Tax Advice |

You may know Veterinarians who have professional corporations and the arrangements work very well for them.  You likely know other veterinarians who don’t have professional corporations – and those arrangements work equally well for them.

So what’s the better option?

In fact, this is not a one-size-fits-all decision.  Before making a choice, it’s important to carefully assess the benefits and drawbacks of having a professional corporation.  Following are some of the key considerations.

Tax Advantages

Essentially, a professional corporation is a corporation that carries on the professional practice of a veterinarian.  For most professionals, the associated tax advantages offer the greatest appeal.  When you earn income in a corporation in which you are a shareholder and an employee, rather than directly from a practice operated in your name, there are certain tax advantages.

Tax Deferral

Income may be retained in the corporation; professional income is subject to corporate tax rates, which are generally lower than personal tax rates.  In effect, this
allows you to defer significant tax until you decide you want the corporation to distribute income to you as the shareholder.

Small Business Deduction

A professional corporation can claim the small business deduction – currently 15.5% on the first $500,000 of annual income.this is much lower than the top marginal tax rate for an individual – currently 46.5%.

Thus if you are able to save money, you would likely benefit from establishing a corporation where you would leave your savings.this could also allow you to defer annual taxes of up to $150,000.  When you eventually withdraw the funds from the corporation
when you retire or sell the business, you will have to pay personal tax, but you will have earned investment income on the deferred tax for the years the money stayed in the corporation.

Remuneration Flexibility

As a shareholder and an employee of your professional corporation, you have the option of taking money out of the corporation as dividends, salary, or a combination of the two.  This enables you to reduce taxes in a number of situations.  For example, you can draw sufficient income as salary to make the maximum contribution to a Registered Retirement
savings Plan and the Canada Pension Plan.  Or if you have a cumulative net investment loss and want to claim the capital gains exemption, you can opt to receive dividends.

Capital Gains Exemption

When you sell the shares of your professional corporation, you can claim this exemption and receive $750,000 of the gain tax-free.  If you are considering a sale in the short term
however, you should be aware that it can take up to two years for a corporation to be eligible for the capital gains exemption.  Also, some purchasers prefer to buy the assets
of a corporation, rather than shares, in order to reduce potential liabilities.

As a Veterinarian in Ontario, unlike a dentist or doctor, you cannot have additional shareholders of your corporation; you must be the sole shareholder.  You can, however, create a holding company that allows you to own your shares indirectly.  Therefore when you sell your practice, with a holding company in place, you can move non-business related assets out of your corporation and into the holding company.

Managing Practice Debt

When a corporation holds the debts of your practice rather than you holding them personally, the corporation’s lower tax rate typically enables you to pay off debt faster. Incorporating gives you $0.85 on the dollar to use for debt reduction versus $0.54 if your practice is not incorporated.

While there are certain limitations, practice debt can usually be transferred into a corporation at any time.you can therefore acquire limited liability for some debts by, for example, holding in a corporation loans and leases for which you have not provided personal guarantees.

Liability Limitations

A key reason many owners incorporate their businesses is to limit legal liability. unlike sole proprietors or partners in a partnership who are liable to the full extent of their personal
assets for the liabilities of their business, for the shareholder of a corporation, liability is generally limited to the amount the shareholder invested in the company.

This is not the case, however, for veterinary professional corporations. governing provincial statute imposes professional liability, therefore shareholders are liable.
Only insurance can protect you from malpractice.

Savings and Costs

Many of the benefits of having a professional corporation arise from holding cash in the corporation.therefore if you draw most of the profits from your practice for personal needs, there are few tax advantages.  On the other hand, if you invest surplus income after paying personal tax, keeping these funds in a corporation could allow you to invest approximately 30% more.

There are also costs to consider. establishing a professional corporation involves set up costs as well as ongoing legal and accounting costs.  These include incorporation permits,
annual financial statements and t2 corporate tax returns and payments of payroll taxes.  These costs need to be weighed against the amount of money that you could save
through incorporation.

Cautions for Those with U.S. Citizenship/Green Cards

For U.S. citizens or green card holders, there are a number of additional cautions related to having a professional corporation in Canada.  The u.s. government taxes Canadian corporations differently than does the Canadian government.  You cannot receive the foreign tax credit and could end up paying more taxes than you would have if you had not incorporated.  Seek advice from an accountant with expertise in corporate and personal U.S. taxation.

Establishing a professional corporation also impacts insurance, buying, selling, retirement and estate planning and more.  Be sure to consult with your accountant to help you develop the best approach to achieve your short and long term goals.  It’s definitely worth “pawsing” to consider whether a professional corporation is the right strategy for you.

Bottom Line: This article contains information for veterinarians as to whether or not to incorporate.